There’s No Crying in City Finance

Anyone who has seen the movie A League of Their Own, about the first professional women’s baseball league, remembers the famous quote from Tom Hanks’ character, one of the team managers, when confronted with a crying player in the dugout: “You’re crying? There’s no crying in baseball!”

The same can be said about city finance. It might seem that there is plenty to cry about right now. NLC’s recently released research, City Budget Shortfalls and Responses: Projections for 2010-2012, estimates that the shortfall in the city sector from 2010-2012 will be between $56-83 billion. For most cities the full impact of the nation’s economic recession will arrive at their fiscal doorsteps in 2010 and 2011. But, despite these dire predictions, most city leaders aren’t whining about the plight of their cities or crying wolf about cuts they might have to make without outside assistance. The same can’t be said of other levels of government at the moment. The number of “deficit hawks” in the U.S. Congress will increase dramatically in 2010, an election year. Perhaps no state is using a “cry wolf” strategy more than California, where Governor Schwarzenegger has proposed a state budget that essentially says to the federal government “give us $8 billion or else” (“else” being draconian cuts to the state’s safety net programs).

In contrast, a group of mayors that participated in a Mayor’s Innovation Project event in Washington, DC last week painted a dramatically different picture. Denver Mayor John Hickenlooper described the choices cities are facing as being about transactions – with the public about what services they most need and those they can do without, and with the federal government about how to make existing federal programs more effective in cities. Gainesville, Florida Mayor Pegeen Hanrahan suggested that even amid tight budget constraints this is a time for cities to make targeted investments, such as her own city’s ongoing investment in solar technologies. Philadelphia Mayor Michael Nutter, confronted with a $1 billion shortfall over a five-year period, straightforwardly described decisions including cuts in services and a temporary increase in the city’s sales tax that required state legislative approval. Nutter noted that “We didn’t ask Harrisburg for a dime. We asked them only to give us the power to tax ourselves.”

NLC isn’t Pollyanna-ish about city leaders’ difficulties in balancing their budgets. Those difficulties translate into real impacts on quality of life in communities. But, city leaders, perhaps because they see and interact with their residents every day, better understand that there’s no crying in city finance – that being straightforward about the choices they are facing and treating the public as participants in the decision making process creates a better environment for innovation and governance.

The Housing Market Will Stand on its Own

The U.S. government is moving to cease its deep intervention in the housing markets.  The Treasury Department already has stopped buying up mortgage-related securities and the Federal Reserve will taper off its purchases gradually, ending them by March 31. Then in June, the homebuyer tax credit program ends.

As with “cash for clunkers,” the federal efforts to artificially stimulate consumer spending, which has been roughly two-thirds of gross domestic product (GDP), is winding down. 

In the absence of record-low interest rates, subprime loans, tax credits, Option ARM’s and 0% down payments consumers probably will not buy houses in large quantity.  But is that a bad thing? 

If individuals and families have to earn a good credit score, save ten to twenty percent of the purchase price of a house, and have a low debt-to-earnings ratio, future home buyers (and by extension banks, neighborhoods, and the U.S. Treasury) will be better off.  It’s certain that mortgage loans issued under such conditions will be far more sustainable than those that collapsed in the current crisis. 

Some people will be shut out of the mortgage market in the near and mid-term.  Because we as a nation have equated home ownership as synonymous with the American Dream anything that causes some citizens to defer that dream smacks of unfairness at least, and outright discrimination at worst. However, if as a society we begin to again think of a house as a dwelling not an investment; if keeping people in the houses they purchase becomes more important than simply getting them into houses; and if building a habit of savings can exist side-by-side with a habit of consuming; then the United States is well on its way to a very different and more sustainable economic model. 

Yes, under this scenario the mix of housing options in cities and towns is likely to change.  But that does not mean that the fundamental relationships at the center of a community will diminish.

The Local Role in Housing

Local governments don’t control the interest rates on a 30-year fixed rate mortgage nor the regulations that determine who qualifies for a mortgage loan. However, municipal leaders can impact whether or not their community offers a myriad of housing choices to meet the needs of a diverse mix of individuals and families.

Using the power to decide land use, establish codes for building safety and implement certain tax policies, city and town leaders are the single most influential decision makers about the kinds of housing options available within their borders.

Housing defines the community in which people chose to live. But how much choice do potential residents actually have? For example, are safe and modern manufactured homes even allowed as a matter of right in most cities? Zoning rules have their merits, but its is necessary to mandate the minimum size for a garage and the minimum square footage for a residence? Why is mixed-use development  — where commercial and residential share a structure – often not permitted?  Some of these rules cause so much concern that the U.S. Department of Housing and Urban Development maintains the Regulatory Barriers Clearinghouse; a stockpile of state and local rules limiting housing choice. 

If it is a societal goal to ensure descent and affordable housing for all Americans, then localities may need to find new ways to define the unique character of a neighborhood. Moreover, they need to ensure that if the tax code offers an incentive to build a single-family house that there is a similar incentive for building a multi-family house.

Housing choice means serving owner-occupants, potential owners, renters, and those who may need to transition back and forth between owning and renting. The means to achieve housing choice for all is in the hands of the nation’s mayors, city and town councils, and planning directors.

Tragedy in Haiti

We just wanted to give a quick update on the Haiti earthquake.

NLC has created a special page at http://www.nlc.org/haiti with resources and information. NLC has also set up a discussion forum on Facebook (facebook.com/nationalleagueofcities) for cities to share what they have been doing to encourage employees and citizens to assist Haiti at this time.

The White House and relief agencies continue to ask that people not do clothing and other material drives. The best course of action for people wishing to help out is to give monetary donations. This will allow receiving organizations the flexibility to purchase the most needed goods and services. Sending unwanted material goods forces recipient organizations to spend staff time and other resources on sorting, storing and delivering items they may not need. Please keep this in mind in your response efforts.

The Creative Class revisited

The “Creative Class” has become a mainstay in the lexicon of city speak. Made famous by Richard Florida, the term refers to individuals whose jobs are inherently creative, like musicians and architects, or where creativity is a major function of the job, like doctors. As Florida defines it, the Creative Class generates wealth and lots of it. In his book The Rise of the Creative Class, it “accounts for nearly half all wage and salary income in the United States…as much as the manufacturing and service sector combined.”

In this context, Florida argued that as the nation moves from a manufacturing-based economy to one that’s knowledge-based, along with the increasing mobility of businesses, cities with concentrations of the creative class will be the economic power houses. Florida maintained that cities should stop business attraction economic development practices and focus instead on developing places that creative people will desire and flourish. And since the book’s release in 2002 many cities have followed suit, striving for Florida’s 3T’s: Technology, Talent, and Tolerance.

Last week in The American Prospect piece titled, “The Ruse of the Creative Class” Alec MacGillis questioned Florida’s work. According to Macgillis, Florida’s soon-to-be-released book The Great Reset argues “the recession has so decimated many cities and regions that it’s time for the country to cut its losses and instead encourage growth in places that are prospering.” The article raises the question: Do the people in cities considered “nonrenewable” just pack their bags and move to the nearest metropolitan core?

Florida’s sudden change of opinion highlights a major challenge cities face when deciding on an economic development strategy – how to adopt and adapt ideas and theories in the context of their own unique local strengths, realities, and circumstances? How does a city do “place-making” while still keeping its own unique sense of place?

Ironically, Florida provides an answer to this question in the preface to the paperback edition of the Rise of the Creative Class. Florida praised the local leaders who were energized by his ideas, but warned that there are no magic bullets, no one-size-fits-all strategy. He argued that each place needs to find the ideal “fit” for their communities that “…the solution lies in the hands of each region – in the knowledge, intelligence and creative capabilities of its people”.

As for The Great Reset and the cities Florida is counting down and out, I doubt many will be willing to follow his advice this time around.

Housing at Square One

Over 4 million homes were lost to foreclosure in the three years from 2007-2009. Before 2006, the worst record of the decade was just under 500,000 foreclosures in 2002.

Assistance has come in many forms: An army of counselors work on loan modifications for homeowners who are “underwater” on their mortgage; HUD launches Making Home Affordable and the Neighborhood Stabilization Program; city governments board-up, fix-up, and ante-up to keep families in homes and protect neighborhoods from decline. But, in the face of such loses, local government leaders are finding it necessary to return to square one and to begin again.

To be back at square one is to admit that many more mortgages will fail in 2010, that getting a mortgage requires more savings and less debt, and that a house is a dwelling and not necessarily a wealth-increasing investment. Nonetheless, square one is also the place where passion, leadership, and the ever-present optimism of town mayors and city councils counts for much.

Being at square one means seeing if the housing options in your community fit the myriad of individual and family needs. This mixture of choices is less about the number of bedrooms and more about a continuum of opportunities – a continuum that includes small and large apartment buildings, town houses, condominiums, duplexes, and detached single-family houses.

 What tasks then for the city and town officials? Be ready with the information about the rules for winning the game – personal savings, good credit scores, limited debt – perhaps using NLC’s Bank on Cities Campaign as a model. Challenge local financial institutions to make loans fairly to all those who qualify. And finally, ensure your community has housing for renters, for owners, and for those who transition back and forth between renting and owning.